Early this morning the U.S. stock indexes were trading better, the 10-year note yield at 2.18% +1 bp and at 8:30 30 yr MBS price -14 bps. Holiday trading this week and next. Last week’s run up in the stock market didn’t break the rate markets, investors and traders still willing to hold treasuries, supporting MBS prices. U.S. stock-index futures better this morning after the biggest three-day jump since 2011, amid investor optimism that the Federal Reserve will continue to support the economy. Treasuries holding well amid investor optimism that inflation isn’t going increase next year.

U.S. equities jumped 5% in the past three sessions as Fed Chair Janet Yellen said the central bank will likely hold key rates near zero at least through the first quarter, even as the U.S. economy strengthens. December has been volatile to say the least; oil prices and Russia’s currency collapse took the equity market down and initially wiped out $1 trillion of value in stocks to begin the month. The fear factor evaporated quickly after the FOMC meeting a Yellen’s comments; stock indexes have recovered all those losses in the last two weeks. Equities rallied around the world after the central bank said it will be patient on the timing of a rate increase. Yellen said any spillover from the situation in Russia is likely to be small. In the meantime interest rates have held steady compared to the volatility in equities. We don’t expect equity market volatility to end anytime soon, the beginning of the year likely will start with increased volatility after the next two weeks that should cool off somewhat from recent volatile trading.

10:00 am; Nov existing home sales, expected at 520 mil from 5.26 mil, sales dropped 6.1% to 493 mil. Yr/yr up 2.1%, $205,300 average sales price +5.0% yr/yr. Based on the pace of sales there is a 5.1 month supply. At 1:00 Treasury will begin this week’s borrowing with $27B of 2 yr notes.

Looking forward; the 50% decline in the price of oil has yet to have any serious effects on the economies of the Mid-East. Huge amounts of reserves keeping those richer countries’ citizens calm but if crude doesn’t rebound next year the loss of revenues may filter to less services for people in those countries that remain unaffected so far. The Mid-East is already in serious turmoil with tribes of old rising up to reclaim lands and/or convert others to their specific tribal rules. If the Saudis, Kuwaitis, and other Persian Gulf monarchies become unable to transfer some of the oil wealth to the populous it may be next year’s geo-political story.

As longas the 10 can stay below 2.20%/2.21% our work will stay positive for rates at the long end, including MBSs. A solid break above 2.21% on a close will turn our near term outlook. That said, although technically bullish, we don’t want to float. It is unlikely doing so will reward much this week.